BofA Cuts 4,200; More QM vs Non-QM Risks; Citi Selling $63B of servicing; Propect Mortgage's NY Fine
The FHFA announced that Fannie/Freddie loan limits will not be reduced for at least six months and any such reduction will occur after a six-month prior notice. Good - one less thing to worry about. Let's hope the folks at Nationstar are around to care - I continue to hear rumors and field questions about its commitment to lending. You should contact your Nationstar AE/rep/local LO if you have questions - don't ask me. A fair amount of the chatter seems to be centered on the wholesale channel, and other lenders are certainly listening to the jungle drums looking to pick up talent. The only thing constant is change, right?
BofA announced that it is laying off 4,200 mortgage employees (full story...)
Uh oh, here comes a new Dodd-Frank worry. Well, not so new, and in fact this commentary has mentioned it several times. "Six federal financial regulatory agencies are proposing joint standards for assessing the diversity policies and practices of the institutions they regulate. The proposed standards are intended to promote transparency and awareness of diversity policies and practices within the institutions." It's pretty compelling info and will definitely require companies that are regulated by their respective agency (in this case, most mortgage companies' de facto regulator is the CFPB) to assess and provide publicly their policies on diversity. As Jay Patel with Salataris observed, "This is going to shine a light on our industry as we have never had to provide any data other than EEO-1 reports. The document covers both workforce and supplier diversity."
Let's move over to QM and QRM/ATR. The MBA submitted its response to the joint re-proposal of the risk retention rule. A copy of its comments on the issues impacting residential, single-family finance can be found here. At 68 pages it is not a light read, but is a good primer on the current industry.
Yesterday the commentary discussed QM - a topic that is not only complicated but also seemingly subject to change. (And many hope it does before its impact is truly felt by borrowers.) Sure, creditors have some flexibility in developing their own underwriting standards as long as they fit into the QM box. But they must be able to show that the ATR determination was reasonable and in good faith - and it that isn't a statement that lawyers love, I don't know what is!
Lenders do know, however, that Qualified Mortgage loans theoretically provide them with liability protection, either a safe harbor or a rebuttable presumption of compliance. So what are the risks of ATR violations? Attorney Brian Levy points out that "To understand the risks, one needs to understand the penalties. The TILA penalties to borrowers include statutory damages equal to sum of all finance charges and fees paid by the consumer in addition to actual damages, and court costs and attorneys' fees. The statute of limitations is 3 years from the date of violation. Defense in a foreclosure action can be used against whoever tries to foreclose (not just against the originator-thus assignee exposure). There is no time limit on the use of this defense, but the consumer cannot recover more than first 3 years of finance charges & fees plus actual damages & fees (including reasonable attorney's fees)."
So while ATR requires that the lender exercise a reasonable/good faith determination while doing the loan, any future liability comes down to proving that the ATR test was done properly. But let's not forget high-priced loans. QM offers a special legal safe harbor standard applicable to any borrower claim to prove ATR was met if the loan is not a higher-priced transaction. The APR cannot exceed the APOR (Average Prime Offer Rate) by 1.5% or more (3.5% or more for a junior lien). So not only are lenders pretty much capped at the 3% fee level, but also capped in adding those fees to the interest rate. And there is little to stop the lender from being exposed to lawsuits well into the future, questioning not only the specifics of the loan, but also whether "reasonable" or "good faith determination" were applied. Are we having fun yet?
Mr. Levy, with Katten Temple (email@example.com), suggests that there are ways to minimize the risk in non-QM/ATR lending. If any lender embarks down the non-QM lending path, it is critical to know why the consumer needs this non-QM product, not why it makes money for the lender. QM "safe harbor" and Higher-Priced "rebuttable presumption" still pose life of loan risks. The key areas to focus on in all ATR loan risk management include compliance, including Fair Lending and UDAAP, underwriting, data sources, recordkeeping, and servicing. He recommends lenders create and keep an ATR "Time Capsule".
In minimizing risk on the compliance side, remember that the risk of lawsuits increases with compliance violations. Lenders have traditional compliance obligations (timely, accurate disclosures - RESPA/TILA/ECOA), Fair Lending, and HOEPA (lower HOEPA limits using APOR). (ATR applies to all owner-occupied loans, but HOEPA covers just principal residences and HELOCs.)
Tomorrow - Saturday - the commentary will have the usual letters from readers, but will have more on minimizing risk in a QM/non-QM world on Monday! But let's keep on with the recently announced interagency statement on Fair Lending compliance and the ATR/QM rule. Law firm Black, Mann & Graham wrote, "On October 22, 2013, the CFPB, FDIC, FRB, NCUA, and OCC ("Agencies") issued a statement ("Interagency Statement") to address questions from residential mortgage lenders about disparate impact doctrine risks associated with offering only Qualified Mortgages under the new Ability-to-Repay and Qualified Mortgage Rule issued by the CFPB ("Ability-to-Repay Rule"). The following is our summary of the Interagency Statement."
Future and current liabilities are a huge concern. American Banker reports that, "New York State has slapped Prospect Mortgage with a $3 million fine for misleading homeowners on their interest rates, and has cited the mortgage lender for several other violations of state law. An examination of Prospect Mortgage conducted by the state's Department of Financial Services uncovered a handful of violations by the company. Prospect agreed to pay $3 million to settle the allegation that it charged borrowers upfront fees in order to reduce their interest rates over the life of the mortgage, then failed to deliver the promised discounts. It will also refund $427,155 to the homeowners who were harmed. The state claims that, in addition to the deceptive interest-rate practices, Prospect violated "numerous" other laws and regulations. The alleged violations include doing business with unlicensed loan originators and other unlicensed companies, failing to disclose origination information, failing to issue required documents to borrowers and failing to maintain proper books and records. Prospect agreed to fix these violations and to issue periodic reports to the Department of Financial Services detailing its progress." California's Prospect is backed by the private-equity firm Sterling Partners and did $7 billion last year. It bought most of IndyMac's loan-production offices in 2008 after IndyMac failed and was taken over by outside investors.
Citi was in the news with a story that it is selling $63 billion of servicing. Those who trade in such things know that the big banks, for the most part, have been selling off either delinquent mortgages, or mortgages that don't fit with the bank's geographic footprint or targeted channels.
This weekend I head from NC to DC for the MBA conference, and although attendance has already breached the 4,100 mark, President Dave Stevens is encouraging folks to come. "Hello MBA Members, I wanted to make one last personal appeal to all of you. This is the 100th anniversary of the MBA. We are hosting this year's celebration in DC...in the backyard of Congress, the White House, the Regulators, and the Media. We have never more needed to make a loud, clear, bold, statement about the importance of what we do for the nation, the economy, and for the American families that we serve every day whether it be with their rental or owned home, or the commercial real estate that supports them and their community - collectively we make the real estate system come to life with our financing, systems, support industries, legal advisers, and more......it comes from the collective efforts of all of you, the members of MBA. We need to make our voice heard. This year, on our 100th anniversary, you need to be there.....as do your employees. Let's show DC what we are made of, why we matter, why we cannot be overlooked, why we should be listened to. This is our time - help make it happen! Register on our website now!" Here you go.
Fortunately rates continue to behave themselves, and should for quite some time. How can they not, with production down about 50% and the Fed continuing to buy about $3 billion a day? Lenders doing HARP loans are happy with the recent note-date change (when the loan closed versus when it was sold to F&F) made by the agencies. This change, according to Credit Suisse, has expanded the HARP-eligible universe by around $20 billion.
But for whatever reason, the fixed-income markets were quietly worse yesterday: agency MBS prices were off about .125, and the 10-yr closed at 2.52%. The week closes out with three economic reports: Durable Goods, October Consumer Sentiment, and Wholesale Trade for August. It is darned early (and cold) here in the Smokey Mountains in North Carolina, but so far the 10-yr is still sitting around 2.50% and MBS prices appear unchanged.